Monday, April 03, 2006

The last few years have seen a lot of creative financing to purchase homes as prices rose out of control, with a huge increase in the percentage of adjustable rate mortgages (ARMs) used by first-time home buyers in order to stretch the limits of what they could afford to buy. About 25% of all current mortgages in the U.S. are ARMs. Unfortunately, many of those who got them did not understand what they were signing up for, and one in five subprime ARM homeowners in West Virginia, Alabama, Michigan, Missouri, and Tennessee was more than 30 days late with a payment at the end of last year. The peak of ARM interest-rate resets will occur in 2007-2008, which leads one researcher to predict that up to 1 million of 7.7 million homeowners who took out ARMs in the last two years will end up losing their homes to foreclosure in the next five years, with banking losses of up to $100 billion--painful, but less than the S&L crisis.

The last time interest-only ARMs were popular was in the 1920's, when the fall of home prices caused many of those who had them to lose their homes. In the last few years, they've been pushed hard by sleazy mortgage lenders with things like illegal telemarketing calls and deceptive direct mail pieces that look like they're something important from your current lender, a refund check, or something else highly desirable or urgent in order to get you to open it.